There has been a consistent flow of articles in the mainstream press, such as the
, and the
, expounding on the growing cash pile among established mutual funds that are focused on value stocks.
Most of the funds concentrate on large-cap stocks, but not exclusively. The managers have usually been at the helm for many years and do not have fund charters that prevent them from timing the market.
“Timing the market” isn’t what they necessarily set out to do; they’re just naturally raising cash due to a paucity of stocks that meet their criteria for value.
That raises the question, is this a warning sign?
To check, let’s go back as far as we can and look at the “timing” record of several of the funds mentioned in recent articles. We only want to look at funds with three main criteria:
1. funds that have a long record
2. funds that have usually beaten the market
3. the fund manager isn’t afraid to raise cash levels
That resulted in the following:
Yacktman Fund (MUTF:YACKX)
Weitz Value Fund (MUTF:WVALX)
Pinnacle Value Fund (MUTF:PVFIX)
Fairholme Fund (MUTF:FAIRX)
Tweedy, Browne Value Fund (MUTF:TWEBX)
Unfortunately, I’m somewhat limited with regards to data, restricted to what Bloomberg News has in its extensive regulatory database. None of the data goes beyond 1999.
Another challenge is that the sample might not necessarily be representative. There could certainly be other managers out their that fit the criteria above that I simply don’t know about, and they could all be 100% invested, which would skew the results higher.
To determine their stock exposure, I included all money invested in stocks and other stock-focused funds. Any exposure to bonds or cash was excluded.
Within the confines of this data, these managers’ exposure to the stock market has hit a new low.
All five funds have stock exposure right around 90% or below, with the lowest being Pinnacle with only about 60% exposure to stocks.
Whether this is a good sign or a bad sign for stocks is debatable. Fund managers had reduced their exposure ever so slightly in 1999, which was good, but were essentially fully invested in 2007, which was bad.
I would be inclined to consider this a warning sign, but can’t rule out confirmation bias as it would fit with the caution sign being suggested by many of my firm’s sentiment indicators and studies. One could also argue that the data is inconclusive due to limited sample size and lack of clear signals in 1999 and 2007.